Metrics - The Online Advantage

I believe that online businesses have a key edge over offline businesses - they are able to easily gather data on customers, the purchase funnel and conduct iterative A/B testing. Harnessing this data and using it to drive decisions for customer acquisition, product development and generally having excellent management information (MI) is critical to executing a successful internet business.

There are three things that I want to touch on in this post:

Using Metrics to raise financing: While I was working in VC last summer, I encountered many entrepreneurs and it was interesting to see how they all thought about and ran their businesses. It was significantly more impressive and informative when the entrepreneurs understood the right metrics for their business. It allowed them to educate us on the important variables and what the implications were for their business and it also made it easier to compare the business against other models that we were familiar with. I think that it shows professionalism and credibility to be on top of this information and it was definitely something we used to screen entrepreneurs.

Segmenting customer base - yield optimal unit economics: Once the product has been launched and the customer base starts to expand I think it's really important to start to segment the customer base and understand the motivations and unit economics of each segment. I think you should start by understanding what attributes that you can use to segment customers - demographic information, source of click, etc and then measure these attributes against engagement metrics, revenue per user, social metrics etc. This will allow you to identify different user groups, understand what motivates them (potentially through qualitative studies) and plot their evolution over time. This data would be extremely useful to drive product changes as well as acquire specific types of customers.

For example: I was recently talking to Pasha Sadri at Polyvore (a social fashion site where people create sets or outfits which are shared with the community) and a handful of talented "creators" drive 80% of the traffic to the site (approx. 6M monthly users). If they were able to identify patterns about where these creators come from / demographic it would be easier to acquire more creators and they would drive significantly more traffic to the site.

Product changes - A/B testing: This is a pretty heavily blogged about topic but I think you should use data and metrics to drive and measure incremental product changes. It's especially efficient when you have a suite of products with similar features and you can leverage learnings from one product change and apply it to the family of products. Zynga are especially good at A/B testing and they have learnt best practice in monetisation/virality and roll out their learnings to new and existing social games very effectively.

Approaching Start-Ups and VCs

Continuing on from my last post.. an MBA looking for a start up opportunity..

I think it's important when you approach early stage start-ups and Venture Capitalists to clearly articulate what value you could bring (particularly for small ventures) but try and retain humility. You want to make it an easy decision for them to say yes to having a conversation with you.

There seems to be some negative feeling (arrogance and entitlement) associated with HBS MBAs in the start up community in particular and it's our collective responsibility to try and quel that sentiment. My proposed approach is to be totally honest about your expectations and motivations for wanting to join the start-up and be flexible on compensation, equity and your job title. I think it's really important to emphasize (and actually believe) that you are motivated by the same things as your potential colleagues and being honest and flexible upfront is the way to understand your compatibility as quickly as possible.

In general, I try and think about things from the eyes of the person receiving your message....

An important part of a Venture Capitalist's job is to help recruit talent for his/her portfolio companies. I think you should make it as easy as possible for them to forward your application over to their CEOs. These guys are often busy and do a lot of work from their mobile devices - if your story is compelling and your credentials look good, I don't see why they would not send your message to their portfolio companies.

A couple of guidelines that I use (in chronological order):

• Introduce yourself clearly and highlight your current situation (when you graduate) in the first line
• State which particular companies in their portfolio you are interested in
• Articulate what you would like to do/what skills you bring based on some sort of expertise
• Identify why these skills/expertise would be important for the portfolio company
• Show that although you have a value proposition you are willing to be flexible 
• Ask to speak with the VC - they will most often not have time but are awesome people to get advice from

I think the same principles apply to when you are approaching a venture directly, but I try and talk a little bit more about why I like the product/company. Founders/CEOs are pretty emotionally attached to their products and it's always nice for them to receive positive feedback from their users.

I am of the opinion that no conversation with a smart, successful person in a field that you are interested is a wasted conversation and each one will help you understand a little more about what you want and perhaps open up new opportunities - you never know!! 

I've had reasonable but not exceptional success with this approach so would love to get other peoples' thoughts - would be good to share the collective wisdom.

An MBA Looking for a Start-Up Opportunity...

Like many MBAs out there, I'm looking to work for a start up when I graduate in June - a recent survey showed that appox 15% of our 2010 HBS class feels the same.  I really like new/innovative technology and the internet and so I've narrowed my search to that area with a focus on the Bay Area.

I wanted to share my approach to finding start-ups with the rest of you. In my opinion, it's really similar to being a Venture Capitalist for yourself with a couple of adjustments depending on your goals and personal risk tolerance. 

If you don't have a background in technology, it probably makes sense to work for a bigger start up (with a solid brand) to give yourself a bit more legitimacy in the market. I think there are loads of solid opportunities out there and I'm also looking at these companies. Some examples of the size of companies I'm taking about are Gilt, Linkedin, Zynga and Facebook. These guys are pretty well-established but still pre-exit and are low risk, in my opinion, but with great people and learning opportunities.

My general approach for finding smaller start-ups is something Ben Holmes (Partner at Index Ventures who sat on the Playfish Board) taught me this summer and he writes about it on his blog. 

1. Market - Is the market big enough ($1Bn+) and can you see this venture being a leading player (with 10%+ mkt share) in the next 3-5 years?
2. Technology - has the company got a differentiated product/technology?
3. Team - has the company got an exceptional and complementary team?
4. Traction - has the company got positive user and/or revenue traction for their product?

Ben's philosophy, and something that I've tried to apply when thinking about ventures, is to find companies which are exceptional (A++) in one or more category, not companies that are a 'B+' in every category. 

I keep a prioritized list of these companies and try and find ways that I could be connected to the management team through my network. If there is no connection, then I will often email the VC on the board or the management team directly. 

There are a couple of things that I think are also important when making your choices:

• 'Go where you want to live' Joe Lassiter told me that in a meeting I had with him last semester - it's important to start building a network at a local level
• Understand what the advantages and disadvantages of joining a small vs. bigger company:
• Small company - IF you build a great product and company from a small scale and have a successful exit I think you build a lot of credibility and it'll be easier to be a co-founder in your next venture
• Bigger company - you get the advantage of good branding and learning a specific set of skills from people who know what they are doing
• Try and be as flexible as possible on your salary, equity, and job title if it's a company and product that you are really passionate about - I figure all that stuff will come if you do a really good job

I will write again in the next couple of days about how I think about approaching companies and VCs.

Thanks for reading!

Fashion 2.0 - Apparel goes digital

Fashion & Apparel is one of the fastest growing online areas and there is a tremendous amount of innovation in the space. The market is large ($150BN in 2011 in the US) of which online spend is likely to make up about 25%. Top-tier Venture Capital firms such as Benchmark, Matrix & IVP have invested in innovative models which are creating shifts in the online fashion & apparel markets.
There are a few areas that I find extremely interesting:

1) Limited Time Sales: using email lists to target buyers of high fashion products in time sensitive sales.

• Vente Privee in France (almost $1BN Revenue in 2009) pioneered this model for luxury fashion goods in Europe and there has been some great success with US companies emulating this model. 
• Gilt Groupe have got some great press and have done an awesome job at expanding into new verticals (Fusion, Men, Travel) and Ruelala had a successful $350M exit in 2009 to GSI Commerce.
• Shopittome has a pretty interesting model where users input large amounts of information about their preferences and receive highly personalised sales. They seem to be doing well and have no venture funding - it would be interesting to see if IP can be created with such innovation to increase the barrier to entry in the space.

I do feel that the major department stores are in a better position than these players as they have pre-existing relationships with the brands, and access to a lot more customer data from their stores - in the long term I think they are going to come out on top...


2) Bridging the gap between online and offline shopping 

• Image Recognition: People are great at buying stuff they search for, but they have already discovered it offline. Like.com and Modista allow people to specify items they like the look of, but then suggest alternative products which are similar based on image recognition
• Social Shopping: Social fashion is a fragmented market and no-one has really solved the issue of creating a social platform for people interested in fashion/apparel - this is a cool area to look out for... I really like the idea of using games to drive engagement and try and gauge product/style demand this way. 

3) Crowd sourced content: There are a bunch of companies working on crowd sourcing apparel content and we've studied a bunch of interesting models at HBS (Threadless & Zazzle) which are great and have shown that crowd sourcing of product design is a great way to engage customers and drive sales.

• Polyvore have built an awesome product which crowd sources editorial/fashion collages (what Vogue and Elle produce). They have pretty amazing usage stats (5M+ monthly actives growing at 10% MoM) which I think makes them the most visited fashion site on the web. I think it's one of the most innovative sites I've seen for browsers to discover new products. For fashionistas out there - it's definitely worth checking out..

4) Men's shopping: Men are rubbish at buying stuff online. As a group, we are not good at sale shopping, buy only stuff that we are familiar with and don't shop that often. There are a couple of cool companies that i've come across to cater to more niche needs - they have built brands online alone and have a small but dedicated following.

• Bonobos make trousers that fit the modern, younger, and more athletic man (/yuppie) - and I think each customer has bought >1 pair - it's definitely branding itself as a niche product and will be interesting to see if they can maintain this identity as they expand to more products.  
• Proper Cloth allow men to completely customize every aspect of their shirts - from collar cut to the colour of your cuffs. The barrier to entry for a user to try this is a little high ($120+) but it's definitely a service I would use if I was happy with the first shirt.

5) Rental Models:  Sometimes it's too expensive to buy stuff - especially high fashion items or things you don't wear very often.

• Avelle (previously Bag, Borrow or Steal) have set up a service where you can rent handbags by subscription and send it back when you are done to get the new hot thing. Great idea but I wonder how women feel about using someone else's bag - I've heard that one can get pretty attached to these bags :)
• Rent the Runway was founded by a 2009 HBS student and has received venture funding from Bain Cap Ventures. Users can rent ball gowns, tuxedos or other high cost/low wear frequency items. If I were them, I would focus on stuff people already rent, as opposed to high fashion items for the fashionistas. Will be cool to see how they do....